Thursday, April 30, 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 14,000 to 631,000 from last week’s revised 645,000 claims while “continued” claims jumped 133,000 resulting in an “insured” unemployment rate of 4.7%.

It’s important to note that the two most significant periods for job cuts on a non-seasonally adjusted basis is January 15 and July 15 so as July and clearer visibility on H2 quickly approaches it will be interesting to see how initial jobless claims fares.

Also, the continuing claims series is presenting the clearest picture of what is likely to be one of the most problematic aspects of this period of economic crisis namely how to make an immense and growing number of highly specialized (college educated) service/professional service workers productive again.

It’s obvious now that we have reached the first real test of our majority services-based economy.

Unlike the “tech-wreck” of 2000-2002, our current downturn is very broad, leaving no sector and virtually no corner of the country untouched.

With millions of college educated workers now on the market incomes will clearly suffer but moreover, it will be soon all too clear that our prior bubble economy significantly overproduced service workers (particularly professional service workers) for which current employment opportunities will be scant resulting in continued and fundamental vicious-cycle effects.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and now has we have fully entered, instead, a mid-cycle meltdown.

Wednesday, April 29, 2009

You go off buying BRK.A or BRK.B shares with the assumption that Buffet makes sensible long term investments and now you come to find he’s been making oddball bets like a drunkard at OTB… What deception!

Further, the single family median home value declined a whopping 19.0% on a year-over-year basis to $255,000 while condo median prices dropped 14.9% to $224,500.

Clearly, the impact of the recent stock market crash (that keeps on crashing) and ongoing economic crisis is bearing down on both consumer sentiment and, more fundamentally, credit availability resulting in a significant pullback in spending on homes and other costly purchases.

It’s perfectly clear now that home sellers that choose to wait out the “down market” did so in vain as the 2008 selling season marked likely the last opportunity to sell any residential property at anywhere near the prices set in the peak boom years.

With confidence depressed and eroding and sale volumes this low, Boston area home prices have nowhere left to go but down.

Of course, the Massachusetts Association of Realtor president Gary Rogers continues his more hopeful tone while embracing government handouts for his industry:

“With the drop in prices, conditions still favor the buyer, especially the first-time homebuyer, and we do expect they will continue to respond well to the first-time homebuyer tax credit that was signed into law by President Obama in February.”

It’s important to keep the following points in mind when considering the impact of the housing tax credit legislation:

The credit is for “first time” home buyers only… if you have had ownership interest in any home (including condos) anytime in the last three years you are NOT eligible.

The credit has income restrictions of $75,000 for individuals and $150,000 for married couples filing jointly.

The credit can only be used for principle residence.

The credit cannot be applied to the downpayment.

So this is really a very limited program and will very likely NOT result in any noticeable increase in demand in our area.

For February, both the CSI and RPX showed continued weakness with the CSI declining 7.20% on a year-over-year basis while the RPX dropped 20.72% over the same period.

Further, both reports indicate that area home prices have suffered significant peak declines with the Boston CSI showing a decline of 18.46% since the peak set in September 2005 while the Boston RPX shows a 38.63% price decline since its peak of June 2005.

It’s important to note also that with the February release the Boston CSI has registered a peak decline that is well in excess (see peak charts below) of the than the peak decline seen during the 90s “savings and loan” housing bust.

Unfortunately for “homeowners” and housing speculators though, we are likely only just now reaching the cliff side for Boston area residential real estate prices.

The most obvious difference between the 90s housing bust and today is that during the 90s the home price decline occurred mostly in-line with the larger macroeconomic decline.

Today though, all of the home price decline seen prior to mid-2008 occurred within a backdrop of an (more or less) expanding economy.

Now that the economy has firmly taken a turn for the worse (particularly our local Boston area economy), home prices will suffer to the greatest degree seen in this cycle.

The following two charts compares the Boston CSI to the Massachusetts unemployment rate during the 90s bust and today.

Notice how early we are in the unemployment cycle today… there is lots more pain to go.

Recently S&P introduced a new line of data series that specifically track condominium prices in five select markets including Boston which showed that in February Boston condo prices declined 6.42% on a year-over-year basis and 15.87% on a peak decline basis (see chart below).

In all likelihood the dramatic declines to consumer confidence and increases in unemployment will work to place significant downward pressure on property prices, particularly condo prices, for the foreseeable future.

As you can see from the chart below (click for larger), although the RPX captures a greater degree of seasonality, both series are very strongly correlated.

To better illustrate the drop-off in home prices and the potential length and depth of the current housing decline, I have compared BOTH the normalized price movement, annual and peak percentage changes to the Boston CSI home price index from the 80s-90s housing bust to today’s bust.

The “normalized” chart compares the normalized Boston price index from the peak of the 80s-90s bust to the peak of today’s bust.

Notice that during the 80s-90s bust prices took roughly 46 months (3.8 years) to bottom out.

The “annual” chart compares the percentage change, on a year-over-year basis, to the Boston CSI from the last positive value through the decline to the first positive value at the end of the decline.

In this way, this chart captures only the months that showed monthly “annual declines”.

The “peak” chart compares the percentage change, comparing monthly Boston index values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 105 months (almost 9 years) peak to peak including 34 months of annual price declines during the heart of the downturn.

The final chart shows that the Boston housing market has been, in a sense, declining steadily since early 2001 when annual home price appreciation peaked and the intensity of the housing expansion began to wane (click on following chart for larger version).

It appears that that the main thrust of the housing expansion occurred “in-line” with the wider economic expansion that was fueled primarily by the dot-com bubble and that since the dot-com bust, the housing market has never been quite the same.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage decreased 11 basis points since last week to 4.62% while the purchase application volume decreased .55% and the refinance application volume slumped 21.9% compared to last week’s results.

It’s important to recognize that the Federal Reserve’s “quantitative easing” measures have clearly pushed mortgage rates down spurring increased re-finance activity yet the rate reductions have yet to impact purchase activity, arguably the more important goal.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

Tuesday, April 28, 2009

Today’s release of the S&P/Case-Shiller home price indices for February 2009 again confirms the washout conditions seen in the nation’s housing markets with ALL of the 20 metro areas tracked reporting significant year-over-year declines and ALL metro areas showing large and even shocking declines from their respective peaks.

Further, February brought a slight seasonal deceleration of the month-to-month price slide with the 10-city index dropping 2.08% and the 20-city index dropping 2.17% since January.

In all likelihood, we are now firmly sliding down an even more momentous slope of home price declines as the continued economic crisis and dramatically accelerating unemployment work to both crush consumer sentiment and force panicked mortgage lenders to continue to tighten their lending standards.

The 10-city composite index declined 18.84% as compared to February 2008 far firmly placing the current decline in uncharted territory in terms of relative intensity.

Topping the list of regional peak decliners were Phoenix at -50.80%, Las Vegas at -48.44%, Miami at -45.07%, San Francisco at -44.87%, San Diego at -41.35%, Detroit at -41.28%, Los Angeles at -40.44%, Tampa at -38.99%, Washington DC at -33.08%, Minneapolis at -31.98%, Chicago at -25.09%, Seattle at -20.89%, Cleveland at -20.84% and Boston at -18.46%.

Additionally, both of the broad composite indices showed significant declines slumping -31.64% for the 10-city national index and 30.67% for the 20-city national index on a peak comparison basis.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are still likely less than half of the way through the portion of the decline in which will be seen fairly significant annual declines (click the following chart for larger version).

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.

Notice that peak declines have been FAR more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

The current Radar Logic data reported on residential real estate transactions (condos, multi and single family homes) that settled as late as February 23 appears to indicate that price declines are continuing in nearly every market with some markets accelerating notably.

Clearly, the impact of the recent stock market crash (that keeps on crashing) and ongoing economic crisis is bearing down on both consumer sentiment and, more fundamentally, credit availability resulting in a significant pullback in spending on homes and other costly purchases.

As the economic fallout continues, look for more markets to experience a reacceleration of price declines.

Phoenix, and Miami are clearly continuing their historic price slide as the number of distressed sales climb and buyer sentiment relents under the weight of the recessionary conditions.

Los Angeles, San Francisco and New York appear to be showing a slight bump up in prices on a month-to-month basis but still remain significantly below each series respective 2008 level. It’s important to note that both the S&P/Case-Shiller and RPX data is NOT seasonally adjusted so in all likelihood these regions are just experiencing a little pause in the decline coming from the spring sales volume pickup.

Boston, Denver and Chicago all appear to be following the typical seasonal pattern of increasing prices during the high transaction months of the spring and early summer and price declines during the fall and winter but it is important to note for Chicago and Boston, prices are clearly trending lower.

Washington DC continues to be a nearly perfect examples of a market that has broken down under the strain of the housing bust and wider economic turmoil showing consistent price declines throughout spring and summer months where normally strong seasonal sales patterns typically brings increasing prices.

The latest results of the Moody’s/REAL Commercial Property Index strongly suggests that the nation’s commercial real estate markets are now firmly experiencing a tremendous downturn with prices plummeting a whopping 21.24% on a year-over-year basis and a stunning 21.49% since the peak set in October 2007.

The Moody’s/REAL CPPI data series is produced by the MIT/CRE but is noted to be “complimentary” to their alternative transaction based index (TBI) as it is published monthly and is formulated from a completely different dataset supplied by Real Capital Analytics, Inc.

Sunday, April 26, 2009

First in “Drawn and Quartered”, Ira both illustrates the differences between seasonally adjusted, non-seasonally adjusted and annualized data series as well as giving us a better view of foreclosures relative to annualized new and existing home sales.

Next in “No News Is … No News” Ira demonstrates a startlingly cool correlation between housing turnover (total home sales / housing stock) and profit motive (annual home price change – mortgage interest rate)…. This is a particularly interesting exercise in that 5 data series are leveraged to build a correlation between two concepts that we would generally assume to be true but SEEING (the data) IS BELIEVING! Bravo Ira!